A Toxic Economy and a Witches Brew

The equity markets continue to advance out of the January/March lows, commodity
prices surge, oil continues to hit record highs and the consumer is now pulling
back in a big way. History tells us that manipulation ultimately fails and
that it typically only serves to make matters worse in the end. Well, when
looking at what is physically happening around me, if the technical picture
that I now see developing continues to unfold, then the backlash from the attempts
to "stimulate the economy" may have now created a witches brew with a not so
happy ending.

First, I want to begin with the equity markets. My intermediate-term Cycle
Turn Indicator turned up at the March lows just as the dumb money indicators
that I follow were recording the most bearish sentiment readings since the
1998 4-year cycle low. Yes, that's right. By this measure we saw even more
bearish sentiment readings surrounding the March 2008 low than we did at the
2002 4-year cycle low. When my intermediate-term Cycle Turn Indicator turned
up in conjunction with that low and these extreme readings I told my subscribers
then that the extended move into the 4-year cycle low had likely found its
mark. To date, I continue to believe that the 4-year cycle low was made back
in January on the Industrials and the Transports and in March on the S&P
500.

However, the question now is: "How long does the advance up out of that low
last?" Back in the fall of 2007 Jim Puplava announced his "Oreo theory," which
called for a decline into the first part of 2008. This analogy then called
for a rally as we hit the creamy filling and then once we worked through the
creamy filling there would be more weakness. The first time I heard this analogy
I agreed with it because fit perfectly with the technical landscape that I
was watching. So, as I said back in March, we have made it to the creamy filling.
But, now in order to know when we reach the end of this filling I have to monitor
my statistical data, the cyclical structure and my Cycle Turn Indicators at
the various levels along with the other technical indicators that I follow.

In the chart below I have included the Dow Jones Industrial Average along
with the NYSE cumulative advance/decline line. One of the issues that I am
now seeing with this rally is the light volume and lagging breadth. Price bettered
its February 1st high on April 18, 2008. It was not until Friday that the NYSE
cumulative advance/decline line finally bettered its February high.

For those that question the integrity of the NYSE data because of the interest
sensitive securities, I have also included in the next chart below the Industrials
along with the AMEX cumulative advance/decline line. Here you can see that
the AMEX, stock only, advance/decline line is lagging badly. The fact that
breadth is not expanding along with the price advance is reason to question
the health of this advance.

But wait, it gets worse. Below I have included a chart of the Nasdaq 100 along
with the cumulative Nasdaq advance/decline line. First I want to point out
that the divergence, or non-confirmation seen surrounding the October 4-year
cycle top was even more pronounced here than it was by the other two advance/decline
lines. Secondly, as price has advance out of the March low the NDX 100 has
moved up some 21% as opposed to a 13% advance by the Industrials. Yet, the
breadth expansion seen by the Nasdaq is anemic at best. Again, the fact that
this advance is occurring without an increase in breadth is not a healthy sign
for a brand new 4-year cycle advance. Should breadth begin to build in the
weeks ahead, then I would feel much more comfortable about the future of this
4-year cycle advance. But, until such time this serves as one of many reasons
that I am beginning to question the sustainability of this advance.

Another item that is contributing to the toxic American economy is rising
commodity prices and the stagnate business environment that rising commodity
prices have caused. Let me give you a few examples. This past week I went to
my local lube and car wash. The manager and I were talking while I was waiting
on my vehicle to be washed. He told me that a year ago they would do anywhere
between 80 and 100 oil changes in a typical day. But, with the rising fuel
prices business has dropped to an average of somewhere between 50 and 60. As
for car washes, he said that they were doing upwards of 400 a day. At present,
business has dropped to between 60 and 100 per day.

Another friend of mine is a boat dealer and sells bay boats and pontoon boats.
This time last year you could go by his store and you could hardly talk to
him because he was so busy. I remember needing something and literally not
being able to get to him. He told me this week that June is his peak month
and it was absolutely dead at his store. He said that he counts on the summer
sales to help carry him through the winter season. He is now worried about
making it through the summer. There was also another local business owner present
and he too is also now feeling the exact same pain.

In yet another example, I needed a trailer ball so I stopped in at a truck
accessory store. It was also dead there and I quizzed the owner. He too was
telling me how slow it had gotten. He said that recently he had 13 employees
between all of his sales and installation people. He is now down to one sale
person, a secretary, one installer and himself. He said that it is now costing
him to keep the doors open. He had a beautiful black 4-door F-250. He said
that it cost $170 to fill it up and he had it parked in the shop and is no
longer driving it.

Here's another one. I went to the local mall with my wife this week. She knows
the lady that runs one of the shops in the mall. This lady is looking for a
job because sales are so bad that the company is not going to renew its lease
this summer and will be closing the doors.

In yet another example, I was talking to a lady at the local gym. Yes, I talk
with everyone trying to get a feel for things. Anyway, she was telling me that
they are now seeing gym memberships declining.

I also know people at one of the local giant home improvement stores. Sales
are down and I am being told that they are not refilling positions in an effort
to cut overhead. This slow down is not just affecting the small business owner.
It is hitting everyone.

The so called "stimulus package" was like handing a band aid to a Ted Bundy
victim. Rising commodity prices are now squashing the economy. On top of that
the stock market advance is so far anemic. It may last a while longer, but
when my intermediate-term Cycle Turn Indicator turns down, it will be a time
for extreme caution. I personally feel that at this time the current 4-year
cycle is setting up to be the polar opposite of the last one. What I mean here
is that the last 4-year cycle stretched and advance for 60 consecutive months,
finally peaking in October 2007. The current 4-year cycle should ideally contract
slightly and is shaping up to potentially top much much sooner than the last
4-year cycle. In fact, this 4-year cycle is at risk of topping much sooner
than the historical norm and if this does in fact occur the statistical implications
would be disastrous.

Now I want to speak briefly about commodities. Many have misunderstood my
previous comments. I have not said that commodities have topped. What I have
said is that we are entering a "cyclical window of opportunity" in which a
major top could occur. I have also said that I think there
is a reasonable chance that this top could occur. At present,
I have absolutely no confirmation that any such top has in fact occurred. When
I look at the statistical and technical data surrounding commodity prices it
tells me that if commodities should fail to top as we approach this "cyclical
window of opportunity," then by default this data will be telling us that commodity
prices will continue to rise until we move into the next "cyclical window of
opportunity" for a top, which would then be years away. These details have
been and will continue to be covered in my monthly newsletter. When I consider
the impact that I'm already seeing on the American consumer I just don't see
how we could possibly stand several more years of rising commodity prices.
It is in part for this reason that I have to think there is a reasonable chance
we could see commodities top within the nearing window.

So, on top of the unhealthy stock market advance we have a tapped-out and
fed-up consumer. People are without a doubt pulling back as rising prices have
choked off discretionary spending. We also have poor business conditions as
a result. In the meantime, both commodity prices as well as the stock market
continue to rise. If commodities miss their upcoming opportunity to peak, then
the fallout from still years of escalating prices will hit the consumer very
very hard and my guess is that that would indeed knock the stock market to
its knees. At the same time, I think it is also possible that given what is
so far a weak rally by the stock market and the tapped out consumer, both the
stock and commodity markets could find themselves on the way down in a much
bigger way than most people can currently imagine. The key to these developments
lie with my statistical data and the Cycle Turn Indicators, which I cover in
great detail in the monthly newsletter. The bottom line is that we have a weak
equity rally, rising commodity prices, poor business conditions and a tightening
consumer. The price action this summer as we move into the potential turn points
are beyond important and I can tell you now that we had best pray for a top
in commodities. Otherwise, rising commodity prices beyond the statistical turn
point will set the stage for rising commodity prices for years to come.

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which has done a fabulous job, on stock market, the dollar, bonds, gold, silver,
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short-term updates. I will also be covering the details on the dollar and commodities
in the coming months as these developments unfold. A subscription includes
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